Managers have to take frequent decision that involves considerations of selling, prices, variable costs and fixed costs. These decisions are based on prediction about cost and revenues. Cost Volume Profit Analysis studies the relationship between expenses (costs), revenue (sales) and net income.
Cost-Volume-Profit (CVP) analysis is an important tool that provides the management with useful information for managerial planning and decision-making. Profits of a business firm are the result of interaction of many factors. Such factors determine whether we have profits or losses and whether profit will increase or decrease over time. Among the many factors influencing the level of profits, the following are considered to be the key factors:
(i) Selling price;
(ii) Volume of sales;
(iii) Variable costs on a per unit basis;
(iv) Total fixed costs; and
(v) Sales mix (proportions or combinations in which different products are sold).
Cost-Volume-Profit analysis is a systematic method of examining the relationships between selling price, total sales revenue, volume of production,expenses and profit. CVP analysis provides the management with information regarding financial results at a specified level of activity, information on relative profitability of its various products. Such information can help the management improve relationship between these variables, i.e., an analysis of sales and cost data can be helpful determining the level of sales volume necessary for the business to achieve a desired or target profit. Similarly, CVP analysis may be used in setting selling prices, selecting the products mix to sell, choosing among alternative marketing strategies and analysing the effects of cost increase or decrease on the profitability of the business enterprise. CVP analysis focuses on prices, revenues, volume, costs, profits and sales mix and on the relationship between them during the short-run.
The short-run is generally considered a period of one year or less than one year during which the production of a business enterprise cannot be increased and is limited to the available current operating capacity of the enterprise. During the short-run, the capacity of plant and machinery cannot be increased. Similarly, it takes time to reduce the capacity of plant and machinery and therefore, a business enterprise should operate during the short-run relatively on a constant quantity of production resources. During the short-run, however, some resources like materials and unskilled labour can be increased at a short notice. CVP analysis herein reveals the effect of changes in sales volume on the level of profits. CVP analysis, in this way, is an integral part of financial planning and managerial decision-making.In CVP analysis, all expenses are classified into fixed and variable expenses.Semi-variable expenses have to be divided into their fixed and variable elements. Based on knowledge of fixed, variable cost elements, and CVP analysis, it is possible to determine break-even sales volume, to compute the sales needed to generate desired profits.
Techniques of CVP Analysis
CVP analysis uses the following techniques or analysis while answering to many questions in the area of managerial planning and decision-making.
(1) Contribution Margin Concept or Profit-Volume (P/V) Analysis;
(2) Break-Even Analysis.
Contribution Margin Concept
Contribution margin concept indicates the profit potential of a business enterprise and highlights the relationship between cost, sales and profit.Contribution margin is the excess of sales revenue over variable costs and expenses. Under contribution margin concept, variable costs include all variable costs, i.e. variable production costs and variable selling and administrative expenses, if any. From the contribution margin, fixed costs and expenses are deducted giving finally operating income or loss. Contribution
margin is thus used to recover/cover fixed costs. Once fixed costs are covered, any remaining contribution margin adds directly to the operating income of the firm.
Contribution Margin Ratio (Also known as CS Ratio or P/V Ratio)
The contribution margin can also be expressed in the form of a percentage.The contribution margin ratio is also known as ‘contribution margin to sales’ (C/S) ratio or profit-volume (P/V) ratio. This ratio denotes percentage of each sales rupee available to cover the fixed costs and to provide operating income.The Profit Volume ratio helps in knowing the effect on income of a firm due to increase/decrease in sales volume. For example, a firm having a P/V ratio of 40% is interested to know the affect of increased sales of Rs. 40,000. With the help of Profit Volume ratio the increased sales will result in an increase of Rs. 16,000 in operating profit.
The Profit Volume ratio is useful to the management in deciding whether to increase sales volume. If the Profit Volume ratio of the firm is high, increased sales will result in higher operating profits. Taking an example, assume the following information in case of a company.
Cost-Volume-Profit (CVP) analysis is an important tool that provides the management with useful information for managerial planning and decision-making. Profits of a business firm are the result of interaction of many factors. Such factors determine whether we have profits or losses and whether profit will increase or decrease over time. Among the many factors influencing the level of profits, the following are considered to be the key factors:
(i) Selling price;
(ii) Volume of sales;
(iii) Variable costs on a per unit basis;
(iv) Total fixed costs; and
(v) Sales mix (proportions or combinations in which different products are sold).
Cost-Volume-Profit analysis is a systematic method of examining the relationships between selling price, total sales revenue, volume of production,expenses and profit. CVP analysis provides the management with information regarding financial results at a specified level of activity, information on relative profitability of its various products. Such information can help the management improve relationship between these variables, i.e., an analysis of sales and cost data can be helpful determining the level of sales volume necessary for the business to achieve a desired or target profit. Similarly, CVP analysis may be used in setting selling prices, selecting the products mix to sell, choosing among alternative marketing strategies and analysing the effects of cost increase or decrease on the profitability of the business enterprise. CVP analysis focuses on prices, revenues, volume, costs, profits and sales mix and on the relationship between them during the short-run.
The short-run is generally considered a period of one year or less than one year during which the production of a business enterprise cannot be increased and is limited to the available current operating capacity of the enterprise. During the short-run, the capacity of plant and machinery cannot be increased. Similarly, it takes time to reduce the capacity of plant and machinery and therefore, a business enterprise should operate during the short-run relatively on a constant quantity of production resources. During the short-run, however, some resources like materials and unskilled labour can be increased at a short notice. CVP analysis herein reveals the effect of changes in sales volume on the level of profits. CVP analysis, in this way, is an integral part of financial planning and managerial decision-making.In CVP analysis, all expenses are classified into fixed and variable expenses.Semi-variable expenses have to be divided into their fixed and variable elements. Based on knowledge of fixed, variable cost elements, and CVP analysis, it is possible to determine break-even sales volume, to compute the sales needed to generate desired profits.
Techniques of CVP Analysis
CVP analysis uses the following techniques or analysis while answering to many questions in the area of managerial planning and decision-making.
(1) Contribution Margin Concept or Profit-Volume (P/V) Analysis;
(2) Break-Even Analysis.
Contribution Margin Concept
Contribution margin concept indicates the profit potential of a business enterprise and highlights the relationship between cost, sales and profit.Contribution margin is the excess of sales revenue over variable costs and expenses. Under contribution margin concept, variable costs include all variable costs, i.e. variable production costs and variable selling and administrative expenses, if any. From the contribution margin, fixed costs and expenses are deducted giving finally operating income or loss. Contribution
margin is thus used to recover/cover fixed costs. Once fixed costs are covered, any remaining contribution margin adds directly to the operating income of the firm.
Contribution Margin Ratio (Also known as CS Ratio or P/V Ratio)
The contribution margin can also be expressed in the form of a percentage.The contribution margin ratio is also known as ‘contribution margin to sales’ (C/S) ratio or profit-volume (P/V) ratio. This ratio denotes percentage of each sales rupee available to cover the fixed costs and to provide operating income.The Profit Volume ratio helps in knowing the effect on income of a firm due to increase/decrease in sales volume. For example, a firm having a P/V ratio of 40% is interested to know the affect of increased sales of Rs. 40,000. With the help of Profit Volume ratio the increased sales will result in an increase of Rs. 16,000 in operating profit.
The Profit Volume ratio is useful to the management in deciding whether to increase sales volume. If the Profit Volume ratio of the firm is high, increased sales will result in higher operating profits. Taking an example, assume the following information in case of a company.
The P/V ratio helps in knowing the effect on income of a firm due to increase or decrease in sales volume. For instance, in the above example, a business enterprise may be interested in studying the effect of having additional sales of Rs. 40,000 on the income of the firm. Multiplying the P/V ratio (40%) by the change in sales volume (Rs. 40,000) indicates an increase in operating income by Rs. 16,000 if an additional sale is possible. The total income will be Rs. 26,000 as is clear from the following computation:
In the above example, variable costs as percentage are 60% of sales (100 – P/V ratio) which is 40%. Thus, variable costs, as a percentage of sales are always equal to 100% minus the P/V ratio.The P/V ratio is useful to the management in deciding whether to increase sales volume. For example if the P/V ratio of a business enterprise is large and the enterprise is operating at less than 100% capacity it will go up because advantageous for the firm to go for increase in sales volume as net income will go up because of higher sales volume. On the other hand, a firm with a small P/V ratio will not find profitable to have increase in sales volume much profitable. In fact, enterprises having a lower P/V ratio should aim at reducing costs and expenses before thinking of increasing the sales volume.The use of P/V ratio in specific analysis is based on the assumption that except sales volume other factors such as the unit-selling price, percentage of variable cost to sales, amount of fixed costs remain constant.
Profit Volume Ratio
Profit Volume Ratio (P.V. ratio) reveals the rate of contribution per product as a percentage of turnovers. It indicates the relationship of contribution to turnover. P.V. ratio may be expressed with the help of following formulae:
P.V. Ratio
Break even points (units) = (Sales − Variable cost/Sales × 100
or
=(Contribution/Sales) × 100
or
=((Selling price per unit − Variable cost per unit)/Selling price per unit)× 100
or
= (Contributi on per unit/Selling price per unit)× 100
or
= (Fixed cost + profit/Sales)× 100
or
=(Change in contribution/Change in sales)× 100
or
=(Change in contributi on per unit/Change in selling price per unit)× 100
or
= (Change in profit/Change in sales)× 100
In the above example, variable costs as percentage are 60% of sales (100 – P/V ratio) which is 40%. Thus, variable costs, as a percentage of sales are always equal to 100% minus the P/V ratio.The P/V ratio is useful to the management in deciding whether to increase sales volume. For example if the P/V ratio of a business enterprise is large and the enterprise is operating at less than 100% capacity it will go up because advantageous for the firm to go for increase in sales volume as net income will go up because of higher sales volume. On the other hand, a firm with a small P/V ratio will not find profitable to have increase in sales volume much profitable. In fact, enterprises having a lower P/V ratio should aim at reducing costs and expenses before thinking of increasing the sales volume.The use of P/V ratio in specific analysis is based on the assumption that except sales volume other factors such as the unit-selling price, percentage of variable cost to sales, amount of fixed costs remain constant.
Profit Volume Ratio
Profit Volume Ratio (P.V. ratio) reveals the rate of contribution per product as a percentage of turnovers. It indicates the relationship of contribution to turnover. P.V. ratio may be expressed with the help of following formulae:
P.V. Ratio
Break even points (units) = (Sales − Variable cost/Sales × 100
or
=(Contribution/Sales) × 100
or
=((Selling price per unit − Variable cost per unit)/Selling price per unit)× 100
or
= (Contributi on per unit/Selling price per unit)× 100
or
= (Fixed cost + profit/Sales)× 100
or
=(Change in contribution/Change in sales)× 100
or
=(Change in contributi on per unit/Change in selling price per unit)× 100
or
= (Change in profit/Change in sales)× 100
Borgata Hotel Casino & Spa to host job fair at Borgata in May
ReplyDeleteBorgata 창원 출장샵 Hotel Casino & Spa has announced it will host job fair 파주 출장안마 at its forthcoming Borgata 원주 출장안마 Hotel Casino & 논산 출장안마 Spa in May. 경산 출장안마